39) If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output
A) increases by 1000.
B) increases by 750.
C) decreases by 750.
D) decreases by 1000.
40) Aggregate output is ________ related to autonomous consumer expenditure, and is
________ related to planned investment spending.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
41) Aggregate output is ________ related to autonomous consumer expenditure, and is
________ related to the level of taxes.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
42) Aggregate output is increased by a decrease in
A) autonomous consumption.
B) government spending.
C) planned investment.
D) net taxes.
43) Equilibrium output is reduced by an increase in
A) planned investment.
B) taxes.
C) government spending.
D) net exports.
44) Keynes believed that unstable investment caused the Great Depression. Using the simple
Keynesian model, explain how a fall in investment affects equilibrium output.
20.4 Understanding the IS Curve
1) If the interest rate falls, other things being equal, investment spending will
A) fall.
B) rise.
C) either rise, fall, or remain unchanged.
D) not be affected.
2) When the interest rate rises
A) planned investment falls.
B) planned investment rises.
C) planned investment will be unaffected.
D) equilibrium income increases.
3) When the interest rate is ________, ________ investments in physical capital will earn more
than the cost of borrowed funds, so planned investment spending is ________.
A) high; few; high
B) high; few; low
C) low; few; high
D) low; many; low
E) high; many; high
4) When interest rates rise in the United States (with the price level fixed), the value of the dollar
________, domestic goods become ________ expensive, and net exports ________.
A) falls; less; fall
B) falls; more; rise
C) rises; more; fall
D) rises; less; fall
5) When interest rates fall in the United States (with the price level fixed), the value of the dollar
________, domestic goods become ________ expensive, and net exports ________.
A) falls; less; fall
B) falls; less; rise
C) falls; more; fall
D) rises; less; fall
6) An increase in interest rates
A) increases the value of the dollar, net exports, and equilibrium output.
B) increases the value of the dollar, reducing net exports and equilibrium output.
C) reduces the value of the dollar, net exports, and equilibrium output.
D) reduces the value of the dollar, increasing net exports and equilibrium output.
7) A decrease in interest rates
A) increases the value of the dollar, net exports, and equilibrium output.
B) increases the value of the dollar, reducing net exports and equilibrium output.
C) reduces the value of the dollar, net exports, and equilibrium output.
D) reduces the value of the dollar, increasing net exports and equilibrium output.
8) The negative relation between investment spending and the interest rate is what gives the
________ curve its ________ slope.
A) IS; upward
B) IS; downward
C) LM; downward
D) LM; upward
9) Points on the IS curve satisfy ________ market equilibrium.
A) money
B) goods
C) stock
D) bond
10) The ________ traces out the points for which total quantity of goods produced equals total
quantity of goods demanded.
A) LM curve
B) IS curve
C) consumption function
D) investment schedule
11) The ________ describes points for which the goods market is in equilibrium.
A) LM curve
B) IS curve
C) consumption function
D) investment schedule
12) Everything else held constant, if aggregate output is to the right of the IS curve, then there is
an excess ________ of goods which will cause aggregate output to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
13) Everything else held constant, if aggregate output is to the left of the IS curve, then there is
an excess ________ of goods which will cause aggregate output to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
14) Everything else held constant, if aggregate output is to the ________ of the IS curve, then
there is an excess supply of goods which will cause aggregate output to ________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
15) Everything else held constant, if aggregate output is to the ________ of the IS curve, then
there is an excess demand of goods which will cause aggregate output to ________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
16) Everything else held constant, if aggregate output is to the ________ of the IS curve, then
there is an excess ________ of goods which will cause aggregate output to fall.
A) right; supply
B) right; demand
C) left; supply
D) left; demand
17) Everything else held constant, if aggregate output is to the ________ of the IS curve, then
there is an excess ________ of goods which will cause aggregate output to rise.
A) right; supply
B) right; demand
C) left; supply
D) left; demand
18) The Federal Reserve increases interest rates when it wants to reduce aggregate demand to
fight inflation. How do increases in the interest rate reduce aggregate demand?
20.5 Factors that Shift the IS Curve
1) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the
________.
A) IS; right
B) IS; left
C) LM; left
D) LM; right
2) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the
aggregate demand function to shift ________ and the equilibrium level of aggregate output to
________, everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
3) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the
aggregate demand function to shift ________ and the equilibrium level of aggregate output to
________, everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
4) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the
aggregate demand function to shift ________, the equilibrium level of aggregate output to rise,
and the IS curve to shift to the ________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
5) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the
aggregate demand function to shift ________, the equilibrium level of aggregate output to fall,
and the IS curve to shift to the ________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
6) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the
aggregate demand function to shift down, the equilibrium level of aggregate output to ________,
and the IS curve to shift to the ________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
7) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the
aggregate demand function to shift up, the equilibrium level of aggregate output to ________,
and the IS curve to shift to the ________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
8) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate
output to ________ at any given interest rate and shifts the ________ curve to the ________,
everything else held constant.
A) rise; LM; right
B) rise; IS; right
C) fall; LM; left
D) fall; IS; left
9) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate
output to ________ at any given interest rate and shifts the ________ curve to the ________,
everything else held constant.
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
10) Everything else held constant, changes in the interest rate affect planned investment spending
and hence the equilibrium level of output, but this change in investment spending
A) merely causes a movement along the IS curve and not a shift.
B) is crowded out by higher taxes.
C) is crowded out by higher government spending.
D) is crowded out by lower consumer expenditures.
11) A rise in autonomous planned investment spending causes the equilibrium level of aggregate
output to ________ and shifts the ________ curve to the ________, everything else held
constant.
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
12) A decline in autonomous planned investment spending causes the equilibrium level of
aggregate output to ________ and shifts the ________ curve to the ________, everything else
held constant.
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
13) In the Keynesian cross diagram, a decrease in investment spending because companies
become more pessimistic about investment profitability causes the aggregate demand function to
shift ________ and the equilibrium level of aggregate output to ________, everything else held
constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
14) In the Keynesian cross diagram, an increase in investment spending because companies
become more optimistic about investment profitability causes the aggregate demand function to
shift ________ and the equilibrium level of aggregate output to ________, everything else held
constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
15) In the Keynesian cross diagram, an increase in investment spending because companies
become more optimistic about investment profitability causes the aggregate demand function to
shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the
________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
16) In the Keynesian cross diagram, a decrease in investment spending because companies
become more pessimistic about investment profitability causes the aggregate demand function to
shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the
________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
17) In the Keynesian cross diagram, a decrease in investment spending because companies
become more pessimistic about investment profitability causes the aggregate demand function to
shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the
________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
18) In the Keynesian cross diagram, an increase in investment spending because companies
become more optimistic about investment profitability causes the aggregate demand function to
shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the
________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
19) A decrease in autonomous planned investment spending, other things equal, shifts the
________ curve to the ________.
A) IS; right
B) IS; left
C) LM; left
D) LM; right
20) An increase in government spending causes the equilibrium level of aggregate output to
________ at any given interest rate and shifts the ________ curve to the ________, everything
else held constant.
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
21) A reduction in government spending causes the equilibrium level of aggregate output to
________ at any given interest rate and shifts the ________ curve to the ________, everything
else held constant.
A) rise; LM; right
B) fall; IS; left
C) fall; LM; left
D) rise; IS; right
22) The IS curve shifts to the left when
A) taxes increase.
B) government spending increases.
C) the money supply increases.
D) autonomous planned investment spending increases.
23) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the
________, everything else held constant.
A) raises; LM; right
B) lowers; IS; left
C) raises; IS; right
D) lowers; LM; left
24) A tax increase ________ disposable income, ________ consumption expenditure, and shifts
the IS curve to the ________, everything else held constant.
A) increases; increases; right
B) increases; decreases; left
C) decreases; increases; left
D) decreases; decreases; left
25) A tax cut ________ disposable income, ________ consumption expenditure, and shifts the
IS curve to the ________, everything else held constant.
A) increases; increases; right
B) increases; decreases; right
C) decreases; increases; left
D) decreases; decreases; left
26) If American college students decide that drinking Mexican-brewed beer helps one get
noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________
curve to shift to the left, everything else held constant.
A) fall; LM
B) fall; IS
C) rise; LM
D) rise; IS
27) If young business professionals in America suddenly decide that driving German-made cars
is an important status symbol, net exports will tend to ________ causing aggregate demand to
________, everything else held constant.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
28) An autonomous depreciation of the U.S. dollar makes American goods ________ relative to
foreign goods and results in a ________ in U.S. net exports, everything else held constant.
A) cheaper; decline
B) cheaper; rise
C) more expensive; decline
D) more expensive; rise
29) An autonomous appreciation of the U.S. dollar makes American goods ________ expensive
relative to foreign goods which ________ net exports in the U.S.
A) less; decreases
B) less; increases
C) more; decreases
D) more; increases
30) A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the
quantity of aggregate output demanded to ________ in the U.S., everything else held constant.
A) decreases; rise
B) decreases; fall
C) increases; rise
D) increases; fall
31) Everything else held constant, a shift in tastes in the U.S. toward Mexican goods will
________ net exports in the U.S. and cause the quantity of aggregate output demanded to
________ in Mexico.
A) decrease; rise
B) decrease; fall
C) increase; rise
D) increase; fall
32) A shift in tastes toward American goods ________ net exports in the U.S. and causes the
quantity of aggregate output demanded to ________ in the U.S., everything else held constant.
A) decreases; rise
B) decreases; fall
C) increases; rise
D) increases; fall
33) Everything else held constant, a shift in tastes in the U.S. towards American goods will
________ net exports in the U.S. and cause the quantity of aggregate output demanded to
________ in Mexico.
A) decrease; rise
B) decrease; fall
C) increase; rise
D) increase; fall
34) A shift in tastes toward American goods ________ net exports in the U.S. and causes the IS
curve to shift to the ________ in the U.S., everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
35) A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the IS
curve to shift to the ________ in the U.S., everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
36) A depreciation of the U.S. dollar makes American goods cheaper relative to foreign goods,
resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the
U.S., everything else held constant.
A) fall; leftward
B) rise; leftward
C) fall; rightward
D) rise; rightward
37) An appreciation of the U.S. dollar makes foreign goods cheaper relative to American goods,
resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the
U.S., everything else held constant.
A) fall; leftward
B) rise; leftward
C) fall; rightward
D) rise; rightward
38) Which of the following does NOT shift the IS curve?
A) an increase in autonomous consumption
B) an increase in government spending
C) a decline in government spending
D) a fall in the interest rate